Water quality trading markets could offer new income stream

Farmers who exceed local standards for runoff could get a financial benefit with water quality trading. USDA and EPA are teaming up to develop systems to determine the value of farm water-cleaning actions. Pilot projects are underway in Wisconsin, Ohio, Oklahoma, Florida, Virginia, Maryland and Pennsylvania.

Economic solutions have been a solid tool for achieving environmental goals. Perhaps the most famous is the idea of power plants trading pollution credits, but there’s one for water that could benefit your farm.

USDA and EPA recently announced they are working together to support the development of water quality trading markets. These markets are expected to provide farmers and ranchers with new income opportunities, in addition to enhancing water quality and conservation.

In such a trading market, regulated entities or permitted emitters (electric utilities, wastewater treatment plants and industrial plants) could buy and use pollutant reduction credits generated by other sources (crop and livestock farmers) in a watershed. Participation in a water quality trading market is voluntary.

The markets would provide a financial incentive to farmers and producers to reduce nitrogen and phosphorus pollutants beyond what is required by any law or other reduction target, which may be part of a watershed plan or total maximum daily load, says Ellen Gilinsky, EPA senior policy adviser.

“Any industries that have a permit that includes limits for a pollutant, such as nitrogen, phosphorus or even temperature, are potential buyers if the credits they can buy are cheaper than installing new technology to meet those limits,” Gilinsky says. If, for example, a wastewater treatment plant needs to reduce nitrogen to 200 pounds per year, but can only get to 100 pounds per year with existing technology, it could buy 100 pounds of nitrogen reduction credits from a producer who has implemented and verified best management practices, or BMPs, that reduce nitrogen input into the watershed by 100 pounds.

Web resources

USDA’s Office of Environmental Markets website offers information on how water quality trading programs work, along with tools producers can use to calculate which management practice would result in credits to sell, says Ann Mills, USDA deputy undersecretary. Farmers also are encouraged to contact the USDA Natural Resources Conservation Service or their local conservation districts.

Pilot projects are underway in Wisconsin’s Fox River watershed and the Ohio River Basin, as well as in Oklahoma, Florida, Virginia, Maryland and Pennsylvania.

In Wisconsin, NRCS, the Great Lakes Commission and the Wisconsin Department of Natural Resources launched a pilot project last summer to reduce high nutrient levels and algal blooms in Wisconsin’s Lower Fox River watershed, which flows into lower Green Bay. Excessive nutrients, including phosphorus, have resulted in a dead zone in Green Bay, says Jimmy Bramblett, state conservationist, NRCS, in Madison.

In the first phase of a three-phase project, the agencies are working with farmers (engaged in both crop and dairy production), the U.S. Geological Survey and the University of Wisconsin’s Discovery Farms to demonstrate and evaluate new and existing conservation practices to reduce phosphorus runoff. They also will set up a framework, or the guidance and policy, for trading water quality credits within the watershed.

The second phase will test the trading of credits between farms and permitted emitters. The third phase will implement the project itself, which is targeted to begin in 2016 or 2017.

In the Ohio River Basin, the Electric Power Research Institute, or EPRI, and a group of power companies, wastewater utilities, farmers, and state and federal agencies are involved in an interstate water quality pilot program.

Ohio, Indiana and Kentucky signed a trading plan in 2012, setting up the world’s largest water quality trading program. The market could gradually involve eight states, with the potential to include 230,000 farmers, 46 power plants and thousands of wastewater utilities.

EPRI contracts with state agricultural agencies, using private and federal funds. (EPA provided $1 million in 2009, and USDA awarded $2.3 million in three separate instances.) The state agencies, in turn, work with local soil and water conservation districts to provide farmers the water quality trading contracts. The local districts provide outreach services and ensure farmers are reducing pollutants above and beyond what’s required by law.

Financial framework

In this cost-share program, farmers would pay just 25% of the cost of implementing and maintaining BMPs (such as cover crops). EPRI pays the remaining 75%, explains Jessica Fox, program manager, EPRI-Environment.

The price of credits fluctuates, depending on the location of the watershed, the distance between the farming operation and the buyer of the credits. The price of credits in the EPRI program would be based on per pound of nitrogen and the cost of the BMPs involved. This would differ on each farmer’s soil, slope of the fields and conservation practice. EPRI conducts analyses based on the particular watershed involved to determine the value. For more information, visit wqt.epri.com.

The Ohio River project has a number of BMPs already in place and will execute a series of stewardship credit pilot trades between 2014 and 2015 to test an online credit registry and live trading market. The first credit trades will take place early this year.

“As markets are built, we need agri-cultural stakeholders at the table,” says USDA’s Mills. She adds that for these markets to succeed, the credits must provide enough financial incentive to farmers to make it worthwhile. Calcu-lating the necessary BMPs and signing up for trading programs should not be onerous. Also, farmers’ privacy must be considered when developing the verification standards, Mills adds.

The water quality trading markets are designed with working lands in mind. “USDA is interested in ensuring credits can be generated by working farms and ranches, not just land retirement,” Mills says. Farmers may even be able to “stack” credits if their BMPs also generate wildlife habitat, carbon sequestration, bio-diversity and other ecosystem services.

The credits must be quantifiable and verifiable, Mills says. The monitoring and approval of these credits will be required, and rules will be set by the state in which the trading occurs, not by EPA and USDA, Gilinsky notes. The length of credit approval can be annual or longer, depending on what the state in which the trading takes place decides. Auditing will most likely be done by conservation districts or third-party contractors.

The federal agencies will provide grants, loans and technical assistance to states, agricultural producers, regulated sources and interested third parties on water quality trading. They also will develop tools and information resources that states and credit generators can use in decision-making. These resources will be used to foster consistency and integrity across regional initiatives.

“This is a 21st-century approach that can create new revenue streams for producers, helping keep farmers as farmers at a time when they are losing acres to development,” Mills says. “It also provides a new set of incentives to make investments in conservation. This is an exciting time for agriculture and ecosystem services.”

Gilinsky adds that the new agreement between USDA and EPA also provides for more education and outreach on trading and how agricultural producers can participate.